Medical Office Bucks the Economy

Michael Schlesinger, founder of Beverly Hills-based Cambra Realty, said it recently when he got one of the highest prices per sf ever paid in Los Angeles for a medical office sale in his headquarters city. And, a financial adviser to Nationwide Health Properties also said it when the Newport Beach, CA-based REIT closed on part of a deal to buy up to $2 billion of medical office properties over the next three years.

Schlesinger sold a 63,276-sf medical office building at 120 S. Spalding Dr. to New York City's LeFrak Organization for $55 million a little more than a year after a joint venture of Cambra and Angelo Gordon & Co. bought the property for $42 million.

Nationwide adviser Philip Camp, managing director with New York City-based investment adviser Shattuck Hammond, says medical properties are a highly desirable asset class in any economic cycle, but "they are in even greater demand today because they are considered a safe haven when other commercial real estate segments falter.

The safe haven aspect of medical offices is one of the features that make them attractive as tenant-in-common investments, according to Jeff Hanson, president and chief investment officer of Santa Ana, CA-based Grubb & Ellis Realty Investors. The firm recently acquired the two-building, 132,000-sf Jacksonville Medical Plaza in Jacksonville, FL, with its proximity to a major hospital and stable rent roll making it ideal for TIC investors, Hanson recently told GlobeSt.com. The plaza is next to Memorial Hospital, a 353-bed acute care hospital with about 700 doctors in 15 medical specialties.

One reason that medical office space in some markets commands such high prices is it's in densely populated areas, which is where it's needed most, but there is no available land for development, entitlements are difficult if not impossible to obtain and the demand keeps increasing as the population grows and ages. As Hanson noted for the Jacksonville transaction, quality medical office space is "generally an attractive option for real estate investment, considering the changing demographics of the US population and the resulting growth in demand for health care."

Brokers who specialize in medical office space are quoting vacancy rates in the low single-digits and the rate at which rents rise can surprise even savvy investors. Schlesinger tells GlobeSt.com that the Cambra-Gordon JV expected rents might rise about 20% when it bought the Beverly Hills building. By the time it sold, rents had zoomed from $4.25 per sf per month to $6.25 per sf per month.

The Beverly Hills building illustrates a trend in which medical office space is outpacing general purpose office space, according to a recent report by Grubb & Ellis Co. From 2000 to 2007, it was discovered that asking rates for medical office space grew 2.8% per year on average while rents for traditional office product grew an average of 1.3%.

According to Robert Bach, Grubb & Ellis' chief economist and author of the report, aging baby boomers and their increasing demand for medical services will fuel demand for healthcare properties over the next decade. As a result, medical properties are positioned to outperform other property types for the next 10 years, he forecasts.

Another illustration of the impact of growing demand for medical space is the decision by the owners of a 96,000-sf office building in Glendale, CA to convert half of the six-story building to medical office space. Michael Dettling, director of the Healthcare Real Estate Group at Los Angeles-based Ramsey-Shilling, which is the leasing agent for the space, tells GlobeSt.com that the nearly 50,000 sf is available for conversion because a large tenant recently moved out.

Converting the space from general office to medical office required approval from the Glendale City Council, which granted the request in light of what the council sees as a shortage of medical office space in the city.